Powell's allies set the tone; a rate cut in December has become a high probability event?

Author: Wu Yu, Jin10 Data

In the past month, Federal Reserve officials have publicly erupted into sharp disagreements over the possible direction of the economy and appropriate interest rate levels. These public debates have led economists and market participants to widely question whether there is enough support within the Federal Reserve to lower interest rates again at the upcoming policy meeting on December 10.

However, in the past few days, the market sentiment has dramatically changed - investors and economists now generally believe that the Federal Reserve is likely to take interest rate cuts in December.

What is the driving force behind this change? Economists point out that, given the ongoing concerns about the health of the labor market, Federal Reserve officials are inclined to cut interest rates again.

Tom Porcelli, Chief Economist at Wells Fargo, stated in an interview: “The deterioration we see in the labor market, I believe, provides a reasonable basis for the Federal Reserve to lower interest rates in December.”

The first official data released after the government shutdown ended shows that the unemployment rate rose to 4.4% in September, reaching its highest level in nearly four years. At the same time, there are signs that the stable trend of “low hiring, low layoffs” in the labor market may be at a critical point of deterioration.

Matthew Luzzetti, Deutsche Bank's Chief U.S. Economist, bluntly stated in a report to clients that the job market remains “in a precarious state.”

A more critical turning point comes from the statements of key officials. Vanguard senior economist Josh Hirt revealed in an interview that he personally believes the Federal Reserve will cut interest rates, with the key basis being last Friday’s public remarks by New York Fed President Williams—who is a close ally of Fed Chair Powell—who clearly advocated for a rate cut and stated, “still believes there is room for further adjustments to interest rates in the short term.”

This statement directly triggered the financial markets, with the expectation of a rate cut in December soaring from nearly 40% the day before to over 70%. Hett said frankly: “I believe the market's interpretation of this is accurate.”

He further added that Williams' position means that the three most influential officials of the Federal Reserve—Powell, Williams, and Fed Governor Waller—are all in support of a new round of easing actions. “We believe this is a very heavyweight camp that is hard to shake.”

Ethan Harris, the former Chief Economist at Bank of America Securities, also pointed out that the economy is showing more convincing signs of weakness, which forces the Federal Reserve to take action.

The “Precise Transmission” of Signals from the Federal Reserve's Senior Officials

The communication from the Federal Reserve—especially at the highest levels—is rarely coincidental.

Signals from the top, especially statements from the Chairman, Vice Chairman, and the highly influential President of the New York Fed, have been carefully weighed: they need to convey a clear policy direction while avoiding excessive reactions from the financial markets.

This is precisely why the speech given by the current President of the New York Federal Reserve, Williams, last Friday was significant for the market. By virtue of his position, he is one of the members of the Federal Reserve's “trio” of leaders, the other two being Chairman Powell and Vice Chairman Jefferson.

Therefore, when Williams hinted at the “possibility of further interest rate adjustments in the short term,” investors interpreted it as a clear signal released by the higher-ups: the leadership tends to lower interest rates at least once more in the near future, with the most likely timing being the Federal Open Market Committee (FOMC) meeting in December.

Krishna Guha, the global policy and central bank strategy head at Evercore ISI, analyzed in a client report: “The phrase 'in the short term' is somewhat ambiguous, but the most direct interpretation is the next meeting.”

“Although Williams may just be expressing a personal opinion, the signals sent by the members of the Federal Reserve's 'Big Three' regarding key current policy issues are almost always approved by the Chairman; without Powell's signature agreement, it would be a professional misconduct for him to send such signals.” He added.

Core of Internal Disputes: Three Major Irreconcilable Controversies

Despite the rising consensus on interest rate cuts, economists still expect that one or more Federal Reserve officials advocating for keeping interest rates steady will cast dissenting votes at the meeting.

Other officials have not been as supportive of interest rate cuts as Williams. Boston Fed President Collins and Dallas Fed President Logan both expressed hesitation about further rate cuts. Collins openly voiced concerns about inflation in an interview with CNBC; Logan took a more hawkish stance, stating that she is even unsure whether she would vote in favor of the previous two rate cuts. It is important to note that Collins has voting rights on the FOMC this year, while Logan's voting rights will take effect in 2026.

Harris stated that, looking at it from a broader perspective, the Federal Reserve is facing an “impossible challenge”: the current economy exhibits stagflation characteristics—high inflation coexisting with high unemployment—and there is no clear Federal Reserve policy response to this situation, which has also led to profound divisions within the rate-setting committee. “There are some very fundamental disagreements.”

The first point of divergence is whether the current Federal Reserve policy is contractionary or expansionary. Officials who are uneasy about inflation believe that monetary policy works through the capital markets, and since the current capital markets are performing strongly, this suggests that the policy may be in an expansionary state; on the other hand, officials who support interest rate cuts counter that the financial conditions in key sectors, such as housing, remain tight.

The second point of divergence revolves around the interpretation of inflation. Dovish officials like Williams argue that if the temporary impact of tariffs is excluded, the inflation level would be lower; however, inflation-wary officials have noted signs of rising inflation in sectors not affected by tariffs.

In addition, all Federal Reserve officials are perplexed by a contradictory phenomenon: why the weak labor market and strong consumer spending can coexist.

Harris stated, “This will be an interesting vote.” He added that the final decision may be finalized on-site at the meeting.

Special Background: Data Vacuum and Considerations of “Insurance Rate Cuts”

Former Cleveland Fed President Mester analyzed that Powell may use the press conference on December 10 to convey a key message: this rate cut is an “insurance cut,” and thereafter the Fed will observe the economy's reaction.

It is worth noting that due to the record duration of the government shutdown, the Federal Reserve will not be able to obtain the latest employment and inflation data from the government at this meeting, which means that decision-making will take place to some extent in a “data vacuum.”

Hett of the Vanguard Group also pointed out that the remarks of those Federal Reserve officials opposing a rate cut in December sent an important signal to the market: the Federal Reserve is not “cutting rates for the sake of cutting rates,” thus preventing the bond market from pricing in higher inflation expectations. “This limits the negative consequences that a rate cut could bring in a situation where inflation is high and the labor market has not obviously fallen into distress.”